nike-business-model

Nike Business Model: Demand Generation As Weapon For Business Growth

Nike makes money by primarily selling footwear via wholesale customers that distribute the Nike brands across the globe. As of 2017, over 60% of revenues came from footwear and over 28% in apparel. The remaining comprised equipment and the Converse Brand. One of the critical ingredients of Nike business model success is its ability to create demand for its products. In fact, as of 2017 Nike spent over $3.3 billion in demand creation campaigns.

What products does Nike sell?

Nike has nine key categories:

  • Running,
  • NIKE Basketball,
  • The Jordan Brand,
  • Football (Soccer),
  • Men’s Training,
  • Women’s Training,
  • Action Sports,
  • Sportswear (our sports-inspired lifestyle products)
  • and Golf.

Men’s Training includes baseball and American football product offerings. Nike also markets products designed for kids, as well as for other athletic and recreational uses such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities

Nike distribution and manufacturing

NIKE has six significant distribution centers located in Memphis, Tennessee, two of which are owned and four of which are leased.

Nike is supplied by approximately 127 footwear factories located in 15 countries. The largest single footwear factory accounted for about 8% of total 2017 NIKE Brand footwear production.

All of Nike footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories.

In 2017 Vietnam, China and Indonesia manufactured approximately 46%, 27% and 21% of total NIKE Brand footwear, respectively.

Nike revenues breakdown

nike-revenues-breakdown

With $21 billion revenues in 2017, footwear represents the 61.5% of the total income. Followed by Apparel, with $9.6 billion and the Converse segment with over $2 billion in revenues.

nike-revenues-breakdown

Global Brand Divisions revenues are primarily attributable to NIKE Brand licensing businesses that are not part of a geographic operating segment.

NIKE Brand wholesale equivalent revenues consist of:

  • Sales to external wholesale customers
  • and internal sales from our wholesale operations to our Direct to Consumer operations, which are charged at prices that are comparable to prices charged to external wholesale customers.

Others include all unisex products, equipment, and other products not allocated to Men’s, Women’s and Young Athletes’.

nike-revenues-breakdown

Men’s sales represent most of Nike total revenues.

nike-revenues-breakdown

Running and sportswear are the categories that generate the most revenues for the company.

nike-revenue-breakdown-by-country

North America represents the most significant market for Nike. Greater China follows.

Nike spending on demand creation

demand-creation-expense

One key ingredient of Nike success seems to be the demand creation.

Demand creation expense consists of advertising and promotion costs, including costs of endorsement contracts, television, digital and print advertising, brand events, and retail brand presentation.

Demand creation expense increased 2% for fiscal 2017 compared to fiscal 2016, driven by higher sports marketing costs, as well as higher marketing and advertising costs, primarily to support key sporting events including the Rio Olympics and European Football Championship.

How does Nike record demand creation?

The Company records demand creation expense for these amounts when the endorser achieves the specific goal. Certain contracts provide for variable payments based upon endorsers maintaining a level of performance in their sport over an extended period of time (e.g., maintaining a specified ranking in a sport for a year). When the Company determines payments are probable, the amounts are reported in Demand creation expense ratably over the contract period based on the Company’s best estimate of the endorser’s performance.

Yet the extent that actual payments to the endorser differ from the Company’s estimate due to changes in the endorser’s performance, increased or decreased demand creation expense may be recorded in a future period.

Other contracts provide for royalty payments to endorsers based upon a predetermined percent of sales of particular products.

Through cooperative advertising programs, the Company reimburses customers for certain costs of advertising the Company’s products.

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Gennaro Cuofano

Creator of FourWeekMBA.com | Head of Business Development at WordLift.io | International MBA

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